Over the past several years, as the U.S. financial sector has gradually revved back into gear and put the economic peril of the late 2000s firmly in the rearview, Europe has found matters more complicated. The legacy of the credit crunch still hangs over the continent with the economies of some nations, like Spain and Ireland, continuing on the long path to recovery while others, like Greece, still find themselves in dire straits.

It is a dynamic evident on the balance sheets of banks and lenders across Europe. More than 1 trillion euros ($1.19 trillion) in non-performing loans, or NPLs—borrowed predominantly against real estate assets that slipped into default (or near default) after the credit crunch—remain on the books across the Eurozone.

The European banking sector has shown signs of improvement; the NPL ratio (the percentage of NPLs compared to total loan volume) dropped to just above 5 percent at the end of 2016, according to the European Banking Authority, down from a 2013 peak of around 8 percent. But observers have continued to express concerns about the scale of what Vitor Constancio, the vice president of the European Central Bank, has termed “the NPL problem.”

“NPLs are bad news for banks,” accounting giant KPMG said in a May report on the European NPL sector. “They consume capital; they require management time and attention that diverts attention from the bank’s core activities; they increase the running costs of the bank; they decrease profitability; and they may even undermine the viability and sustainability of the bank.”

In July, the Council of the European Union unveiled a series of measures designed to alleviate the continent’s NPL burden. Those measures would include heightened bank supervision, the reform of insolvency and debt recovery frameworks, and even a “restructuring of the banking industry.” The Council also called for the “development of secondary markets for NPLs,” which would consist of “the setting up of NPL transaction platforms” that would stimulate the trading of these distressed loans.

The latter measure is particularly interesting, given how global private equity firms have shown increased appetite for European NPLs in recent years and have invested hundreds of billions of dollars in the sector. Indeed, when it comes to lifting the continent’s banking industry and alleviating the strain that NPLs have placed on Europe’s economies, investment from private equity players—including U.S.-based giants like Blackstone Group, Apollo Global Management and Bain Capital—may be the European banking industry’s best hope.

More than 103 billion euros ($122 billion) in deals for European NPLs were completed in 2016, which was roughly on par with the previous year and up from just under 83 billion euros in 2014, according to a recent report by Deloitte. While transaction volume only reached 42 billion euros ($50 billion) through the first half of 2017, Deloitte said it anticipates a busy second half of the year for the sector—with more than 86 billion euros ($102 billion) in NPL deals in the pipeline, which would set a single-year record.

“The bulk of the money is coming from the U.S. private equity sector,” said Richard Dakin, the managing director of CBRE’s Capital Advisors division in the EMEA region. Dakin cited CBRE research estimating nearly 67 billion euros ($79.6 billion) in capital currently available to be deployed by loan purchasers looking to invest in Europe, with 92 percent of that dry powder coming from U.S.-based investors—the majority of them in the private equity sector.

While the United Kingdom and Ireland initially led the way in the years following the Great Recession, Italy and Spain are now the most active markets for European NPLs with 9.3 billion euros ($11 billion) and 4.7 billion euros ($5.6 billion) in transactions, respectively, through the first half of this year. Spain has shown particular appeal to investors buoyed by the nation’s ongoing economic recovery and falling unemployment rate; in July, Bain acquired a loan portfolio from Banco Ibercaja holding a par value of 489 million euros ($582 million) and comprising loans backed by “mostly residential development land” and other real estate assets, the private equity firm said at the time.

“We continue to believe Spain is one of the most attractive NPL and real estate markets in Europe,” Fabio Longo, a Bain managing director and head of the firm’s European NPL and real estate business, said in a statement announcing the deal. “This portfolio, with its sizable exposure to land plots in Spain’s largest cities, is a great opportunity to continue expanding our footprint in its residential development sector.”

The Banco Ibercaja deal was Bain’s ninth NPL transaction in Spain since 2014, but the company has also increased its exposure in other markets around the continent—making its first NPL forays into Italy and Portugal just this year.

Frankfurt, Germany’s skyline as viewed from the top of the new European Central Bank headquarters building. Photo: Ralph Orlowski/Getty Images

Blackstone, meanwhile, has been a high-profile player in the European NPL market since its 2014 acquisition of a residential mortgage portfolio from Barcelona-based bank CatalunyaCaixa (now part of BBVA). That deal saw the investment firm’s Jonathan Gray-led real estate arm pay 3.6 billion euros for a portfolio holding a par value of nearly twice that amount—a value proposition indicative of the appeal of NPLs to investors like Lone Star Funds, Oaktree Capital Management and Cerberus Capital Management, all of which were reportedly in the bidding for the CatalunyaCaixa portfolio.

“There is more competition to acquire these loans, and the pricing has become more competitive,” said Dakin. “If the general economy is improving, then hopefully real estate values are improving, and the ability to make a higher return becomes more attractive.”

This summer, Blackstone made an even bigger move in the Spanish real estate financing market, paying roughly 5 billion euros ($5.9 billion) for a 51 percent stake in the struggling Banco Popular’s commercial real estate portfolio. The deal, which came on the back of Banco Santander’s June acquisition of Popular, placed a 10 billion euros ($11.9 billion) valuation on a portfolio of real estate loans and properties holding an aggregate book value of 30 billion euros ($35.7 billion)—yet another testament of the value to be found in the European real estate financing sector.

“The investment thesis is that Spain is growing very strongly, and if you can buy something at a substantial discount to face value, [that value] can be reached in a reasonable period of time,” according to one managing director at a major private equity firm with exposure in the European NPL market, who did not want to be named.

Italy also continues to attract a lot of activity, leading the European market in terms of NPL transaction activity despite a less bullish outlook on its economy. Italy’s NPL ratio stood at just above 15 percent at the end of last year, according to statistics from the European Parliament—down from the 20 percent threshold it has hovered around in recent years but still well above the continental average.

Despite concerns about the Italian economy’s fundamentals, private equity players continue to make major deals in the country’s NPL market. In July, U.S. investment firms Fortress Investment Group and PIMCO closed on a massive 17.7 billion euro ($21 billion) acquisition of NPLs from Italian bank UniCredit—among the largest deals seen in Europe this cycle. As for other EU member countries with heavier NPL ratios and dimmer near-term economic prospects, such as Greece, investors have been altogether less willing to take the leap into such debt markets.

Nor does it appear likely that major investment banks and institutional investors will delve too far into a market that has predominantly been the domain of private equity heavy-hitters. While recent reports have suggested that the likes of Citi and Morgan Stanley are eyeing NPL opportunities in Europe, it’s more likely investment banks would look to increase their lending against such portfolio acquisitions as a means of indirectly upping their exposure to the market, rather than looking to acquire such precarious assets themselves.

“I think regulators get nervous about [banks] taking trading positions,” said the managing director who did not want to be named. “[Private equity firms] are looking for a five-year turnaround on the investments we make; we don’t buy things because we want to be bigger…If I was a NPL seller, I would call Lone Star or Apollo before J.P. Morgan or Goldman Sachs.”

Dakin said the private equity players who are driving the market for European NPLs are being encouraged by the regulatory push to address the continent’s distressed loan problem.

“The momentum from the European Central Bank has been positive,” he said. “There is a push from a regulatory perspective to increase the volume of NPL sales because it improves the banking system and normalizes the economy.”

NPL transaction volume “should remain strong over the next few years if European economies continue to improve,” Dakin added, before eventually “turning off” as the current deleveraging cycle runs its course.

European banks and regulators would hope that, by then, the continent’s economy will be on altogether more stable footing.